Does Board Diversity Mitigate Risk? The Effect of Homophily and Social Ties on Risk-Taking in Financial Institutions

Noora Alzayed, Bernardo Batiz-Lazo*, Rasol Eskandari

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

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Abstract

Research Question/Issue
This study investigates whether greater board diversity and looser social network ties have an impact on board independence and risk-taking in US financial institutions from 2010 to 2022.The econometric strategy involved structural equation models, where risk as a dependent variable was measured by two latent variables and a total of five measures of risk. Several aspects of board diversity were utilized including gender, social, experience and educational backgrounds.

Research Findings/Insights
The findings suggested that diversity in nationality had a significant positive effect, while age and gender diversity had a minor effect on mitigating risk. Two measures of educational diversity had mixed results while suggesting that financial education is associated with greater risk. Also, social networks had a significant effect on risk-taking, especially on market risk.

Theoretical/Academic Implications
The study highlights the importance of maintaining a sensible level of board diversity across all aspects to avoid issues of cohesion and poor communication. This implication arises from the conclusion that too diverse a board might suffer from the lack of cohesion and communication, while a board with very low diversity will not be able to benefit from diverse backgrounds and expertise.

Practitioner/Policy Implications
Results from this study recommend incorporating social networking requirements in defining the independence of directors.
Original languageEnglish
Article number102306
Number of pages23
JournalResearch in International Business and Finance
Volume70
Issue numberA
Early online date12 Mar 2024
DOIs
Publication statusE-pub ahead of print - 12 Mar 2024

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